Happy Friday! It’s been a tough holiday shortened week for stocks and REITs in general, as the 10-year bond interest rate was flirting above 4% again. REITs were quite overbought and due for some pullback, and that’s just what happened, as about 80% of all REITs finished down on the week. So if you missed the recent REIT rally, you might just get another chance with better prices.

In this issue: Prologis: Close, but no cigar, Millennials about to learn a lesson about financial foolishness and analysts playing catch-up on price targets.

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REIT ROUND-UP: An unusually quiet week for REIT news.

Gladstone Land Corp (Nasdaq: GLAD) January 16, announced it has completed the sale of a Florida farm for $65.70 million, with a 22% increase over the original purchase price.

Spirit Realty Capital Inc (NYSE: SRC) January 18, will be replaced in the S&P Midcap 400 by e.l.f. Beauty, Inc (NYSE: ELF), prior to the opening of trading on January 23.

WINNERS & LOSERS

📈 Biggest Winners This Week: One stands out, but very few made the grade.

• Net lease Office Properties (NYSE: NLOP) Up 18.30%

• Alexanders, Inc. (NYSE: ALX) Up 2.00%

• Whitestone REIT (NYSE: WSR) Up 3.34%

• Digital Realty Trust Inc (NYSE: DLR) Up 1.64%

• Great Ajax Corp (NYSE: AJX) Up 1.51%

 📉 Biggest Losers This Week: Office and Mortgage REITs were very weak

• Medical Properties Trust Inc (NYSE: MSW) Down 12.46%

• Brandywine Realty Trust (NYSE: BDN) Down 9.55%

• Safehold Inc (NYSE: SAFE) Down 10.19%

• Outfront Media Inc (NYSE: OUT) Down 8.23%

• Hannon Armstrong Sustnbl Infrstr (NYSE: HASI) Down 8.21%

• Hudson Pacific Properties Inc (NYSE: HPP) Down 7.42%

• Braemar Hotels & Resorts (NYSE: BHR) Down 7.33%

• Kilroy Realty Corp (NYSE: KRC) Down 7.01%

Prices as of January 18, 12:00 PM

UPGRADES: A very busy week for upgrades and downgrades.

Healthpeak Properties Inc (NYSE: PEAK) January 12, Scotiabank analyst Nicholas Yulico upgraded Healthpeak Properties from Sector Perform to Sector Outperform and announced a $23 price target.

Centerspace (NYSE: CSR) January 16, RBC Capital analyst Brad Heffern upgraded Centerspace from Sector Perform to Outperform and raised the price target from $58 to $63.

Mid-America Apartment Communities Inc (NYSE: MAA) January 16, Truist Securities analyst Anthony Hau upgraded Mid-America Apartment Communities from Hold to Buy. Same day, Scotiabank analyst Nicholas Yulico upgraded Mid-America Apartment Communities from sector Underperform to Sector Perform and raised the price target from $133 to $147.

Whitestone REIT (NYSE: WSR) January 16, Truist Securities analyst Anthony Hau upgraded Equity Lifestyle Properties from Hold to Buy.

Equinix Inc (Nasdaq: EQIX) January 16, Truist Securities analyst Anthony Hau upgraded Equinix from Hold to Buy and raised the price target from $871 to $915.

Federal Realty Investment Trust (NYSE: FRT) January 16, Truist Securities analyst Ki Bin Kim upgraded Federal Realty Investment Trust from Hold to Buy and announced a $117 price target.

Americold Realty Trust Inc (NYSE: COLD) January 16, Truist Securities analyst Ki Bin Kim upgraded Americold Realty Trust from Hold to Buy.

Ventas, Inc. (NYSE: VTR) January 16, Band of America Securities analyst Joshua Dennerlein upgraded Ventas from Neutral to Buy and raised the price target from $48 to $53.

… And Downgrades:

Great Ajax Corp (NYSE: AJX) January 12, JMP Securities analyst Steven Delaney downgrades Great Ajax from Market Outperform to Market Perform.

SL Green Realty Corp (NYSE: SLG) January 16, Truist Securities analyst Michael Lewis downgraded SL Green Realty from Buy to Hold.

AvalonBay Communities Inc (NYSE: AVB) January 16, Truist Securities analyst Michael Lewis downgraded SL Green Realty from Buy to Hold, while raising the price target from $202 to $203.

Sun Communities Inc (NYSE: SUI) January 16, Truist Securities analyst Anthony Hau downgraded Sun Communities from Buy to Hold, while raising the price target from $130 to $143.

Equity Lifestyle Properties Inc (NYSE: ELS) January 16, Truist Securities analyst Anthony Hau downgraded Equity Lifestyle Properties from Buy to Hold, while raising the price target from $70 to $73.

Acadia Realty Trust (NYSE: AKR) January 16, Truist Securities analyst Michael Lewis downgraded Acadia Realty Trust from Buy to Hold.

ONE BIG THING

Prologis Earnings: Close, But No Cigar

What: Prologis Inc (NYSE: PLD) reported its fourth quarter earnings and updated full year 2024 FFO guidance on January 17 that came close, but failed to surpass analysts’ estimates, ultimately disappointed the street.

How: Funds from operations (FFO) of $1.26 met the analyst consensus estimate and was ahead of FFO of $1.24 year-over-year. Revenue of $1.76 billion missed the consensus estimate of $1.81 billion but was a 10.37% increase over revenue of $1.59 billion in Q4 2022. Both FFO and revenue were below the numbers of the previous quarter and its occupancy rate of 97.1% was equal to its occupancy level in the third quarter.

Additionally, Prologis updated full year 2024 FFO guidance in a range between $5.42 and $5.56. Unfortunately, the analyst consensus estimate was nearer the top of the range at $5.52. Ultimately, Prologis came close, but no cigar. Investors were a bit disappointed and the stock fell 2.39% on the day. The following morning it was trading about 1% lower again. Prologis’ tepid results also dragged down the rest of the REITs in the industrial sub sector.

Prologis is a stalwart industrial REIT with 5500 buildings and 1.2 billion square feet of space over 20 countries. Its IPO was in 2013, and for many years it’s been somewhat of a bellwether stock for REITs in general.

Takeaway: With REITs having rallied significantly through November and December, they reached overbought levels just before New Year’s Day. Subsequently, REITs have been pulling back since then and the street is looking for a reason to push them higher. But investors weren’t going to get that go ahead with the Prologis Q4 earnings.

HOUSING NEWS BRIEF

The High Cost Of Foolishness

What: Millennials are ready to pay much more for housing if necessary.

According to a survey done by online publication, Real Estate Witch, although 93% of Millennials say the real estate market has impacted their home buying plans, they still plan to buy, even if it means paying higher interest rates.

Real Estate Witch is a partner to Clever Real Estate, a national company that refers buyers to local top agents and pays cash back to eligible buyers. The survey group included 1000 millennials who are planning to buy a home in 2024.

The results were stunning: 67% of millennials regret not having purchased a home when interest rates were lower. And although about half of them say that high interest rates are a barrier to homeownership, 78% would consider taking an interest rate above the national average rate near 7%, while 65% would accept an interest rate of 10% or more, and 23% even say they would accept an interest rate of 15% or more!

Why: Millennials are willing to accept much higher rates because they plan to refinance if interest rates decline after their purchase. And to limit upfront costs, 47% of millennials say they plan to put down less than 20% on a home.

Assuming the survey participants were being honest, the amount of financial ignorance and even foolishness in their responses is incredible. Consider this:

The Hard Facts: On a $400,000 home, a 30-year, 7% mortgage with 20% down ($320,000 loan), creates principal and interest (P&I) monthly payments of $2,129. Of course, this amount doesn’t include taxes and insurance, which depending on location, can add another $400-$800 to the monthly total, or PITI.

If mortgage rates rise to 10%, the same $400,000 home with 20% down would jump up to $2,808 plus taxes and interest. And at 15%, homeowners would be looking at a whopping P&I of $4,046 plus taxes and interest. Even if they were willing to pay that much, many would probably fail to qualify for a loan at these interest rates.

So let’s assume that the responders were unaware of the actual costs when they said they would still be willing to buy a home at those high interest rates. But they need to realize that a down payment of less than 20% increases the monthly costs even more.

The interest rates are usually higher and with an FHA loan, one is required to pay Mortgage Insurance Premium (MIP), which involves an upfront premium of 1.75% of the loan value (about $6750 with an FHA loan of $386,000 on the $400,000 home) and an additional payment for 11 years of about $20 each month ($2640 total). With a Conventional mortgage, Private Mortgage Insurance (PMI) is required with less than 20% down and PMI runs between $30-$70 per month until the home has about 20% equity in it.

The last bit of folly concerns the assumption that one can easily refinance to a lower interest rate within a few years. In reality, it’s possible that rates won’t decline at all, or only by a small amount. But even if rates come down substantially, there are refinancing costs, generally between 2%-6% of the remaining loan principal, which mortgage lenders or Realtors may casually neglect to mention when telling young borrowers they can always refinance at lower rates. Again, we’re looking at several thousand dollars needed to refinance.

Takeaway: Add it all up and what the responders say they’d be willing to do is a recipe for financial disaster. Fear of missing out (FOMO) can be a very expensive lesson. FOMO on buying a home could be setting millennials up for another wave of foreclosures like the U.S. endured in 2008.

But wait, there’s more: The survey also revealed that 57% of millennials have at least $10,000 in debt and only 25% have at least $10,000 in savings.

And speaking of FOMO, 79% of those surveyed said they would also be willing to pay above the asking price to beat out the competition for their dream home.

Dream home? This sounds more like a nightmare!  

ONE FOR THE ROAD

Price Target Hikes Are On The Rise

What:  Since the start of the New Year, market analysts have been showing new faith in REITs by increasing their price targets like crazy.

Who: Analysts from RBC Capital, Goldman Sachs, Mizuho, Raymond James, Bank of America Securities, Oppenheimer, Baird, Keybanc, BMO Capital, Truist Securities and Jefferies have now raised price targets on REITs about 75 times.

Why: Analysts are scrambling to reestablish realistic price targets for REITs that have far surpassed their previous targets, as REITs get a tailwind from the FED.

Some of the price target increases have been substantial, such as Goldman Sachs analyst Caitlin Burrows’ 20% raise on SL Green Realty Corp from $30 to 36, even though the analyst maintained a Sell rating on the NYC office REIT. SLG was recently trading near $42.60.

Ms. Burrows also maintained a Sell on Macerich Co (NYSE: MAC) while raising the price target 44% from $9 to $13 and maintained Hudson Pacific Properties Inc at Neutral while raising the price target 49.2% from $7.10 to $10.60. Macerich was recently trading near $15.70 and Hudson Pacific was $8.80.

Only about 25% of the price target hikes have coincided with upgrades. Baird downgraded two REITs, Stag Industrial Inc (NYSE: STAG) and Rexford Industrial Realty Inc (NYSE: REXR), but the analyst raised the price targets on both. Truist Securities downgraded four REITs, while raising price targets on all four.

The vast majority of analysts have been maintaining previous ratings while raising the price targets, as if they are trying to play catch up.

Takeaway: Analysts have been a bit shy to upgrade these REITs, perhaps because they missed the boat on doing so in November and December when prices were far lower. At this point, it’s easier and less risky to simply maintain previous ratings. But the price target hikes suggest that analysts are expecting REITs to perform much better in 2024 than they have over the last two years. Many of these REITs, such as SLG, HPP and MAC, are already trading well above the new price targets the analysts have set. Analysts may feel that these stocks have gotten ahead of themselves. We shall see.

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